Unit cost is calculated by which formula?

Unit cost is calculated by which formula?

• A. Total costs of direct cost center divided by service units
• B. Total budgets divided by departments
• C. Indirect costs divided by service units
• D. Total costs divided by service units

Answer: (A)

Unit cost is the cost per unit of service produced. For a direct cost center, you focus on the resources that are directly tied to delivering that service. Take the total direct costs attributed to that center (labor, materials used specifically for that center, etc.) and divide by the number of service units produced. This yields the cost per unit of service from that direct center. Direct costs are separated from indirect costs, which are handled in a different overhead allocation. If you included indirect costs or used total budgets, you’d end up with a different metric that doesn’t reflect the per-unit cost of the direct center’s output.

Unit cost is the cost per unit of service produced. For a direct cost center, you focus on the resources that are directly tied to delivering that service. Take the total direct costs attributed to that center (labor, materials used specifically for that center, etc.) and divide by the number of service units produced. This yields the cost per unit of service from that direct center.

Direct costs are separated from indirect costs, which are handled in a different overhead allocation. If you included indirect costs or used total budgets, you’d end up with a different metric that doesn’t reflect the per-unit cost of the direct center’s output.